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Another chance for newspapers on the Web?

Newspapers have so far made less of the Internet than they might have. But new technologies promise to reset the clock and offer them another chance to cash in on the narrowband Internet.

So far, newspapers have made less of the Internet than they might have.

Although they are the logical owners of a range of online categories from news to classified advertisements, the top-ranked newspaper online is only 37th among Web sites in visitors each month, according to the market research and analysis firm Jupiter Media Metrix. The stock market reflects that missed opportunity: despite last year's market correction, Yahoo--a Web portal that offers news and other features--created almost twice as much shareholder value during the past five years as did the six leading U.S. newspaper groups combined.

Fortunately for newspapers, novel technologies--wireless and fixed broadband--will reset the clock for all e-businesses, giving another chance to companies that missed the boat on the narrowband Internet.

In much of Europe and Asia, mobile telephones are already far more common than home personal computers with Internet connections. These mobile devices can now access information, from stock prices to movie schedules, that until recently was easiest to find in newspapers and other print mass media.

How can newspapers protect and indeed expand their share of the market, broadly defined, as the demand for information through wireless devices grows, eroding the demand for print? As the narrowband Internet emerged, too many newspapers either licensed their content to pure plays for quick cash or tried to create online newspapers without transforming their business models.

Since the businesses that will probably control relationships with wireless customers won't be extensions of traditional narrowband portals, newspapers can now start afresh. The mobility of wireless technology lends itself to location-specific Web features, such as city guides, entertainment listings, and restaurant reviews. Print versions of newspapers already feature such services.

The online businesses that control the customer relationship have the best chance of capturing the major sources of revenue, largely because this kind of control provides unparalleled knowledge of the evolving wants and needs of customers and helps companies tailor their offerings to those preferences.

Providers and newspapers together own the full set of skills needed to offer a successful wireless solution using third-generation (3G) technology. Three kinds of business contend for control of relationships with wireless customers: content providers, including companies (such as newspaper publishers) that generate and aggregate content; service providers, including network operators and resellers, such as AT&T, Virgin Entertainment Group, and Vodafone Group; and device makers, such as Ericsson, Motorola, Nokia, and Palm. Service providers now enjoy the strongest position, mainly as a result of owning the physical networks and the technology platforms connecting them to customers. Service providers therefore own the valuable customer intelligence that lies therein.

They also have the best position for controlling the navigation (or start) page of wireless devices. A Jupiter Media Metrix survey of 3,000 people with Internet connections showed that three-quarters of all neophyte computer users in the United States stick with the default Web navigation page that comes preloaded on their personal computers. Wireless users are at least as likely to stick with their original start page, especially since many of them will be relatively new to the Internet and thus not very aware of their browser and portal options.

But service providers don't have all the skills and assets they will need to exploit their theoretical advantage in the struggle for the customer relationship. Although they control access, they may lack marketing skills, editorial skills and content, or a highly regarded brand name. Newspapers have all that, and local newspapers have greater local knowledge and, perhaps, credibility than do their national counterparts.

Providers and newspapers together own the full set of skills needed to offer a successful wireless solution using third-generation (3G) technology. Newspapers can build their wireless businesses around their content, such as news, weather forecasts, city guides, restaurant reviews, and local entertainment and event schedules. Many newspapers around the globe have already begun to do so. Newspaper editors are particularly well qualified to edit this content into a form suitable for small wireless screens, and the sales forces of local newspapers could help drum up advertising.

Although some newspapers will have to contend with such rivals as city magazines and local television news, newspapers generally have stronger brands and greater credibility than either of these competitors. They also employ more journalists and editors than do television stations and generate a much greater volume of content on subjects from entertainment to health care.

Newspapers can leverage their assets in three ways: by licensing content to wireless providers (the simplest approach), by establishing revenue-sharing agreements with them, and by taking equity in them or in jointly formed wireless ventures. To justify taking equity--the most aggressive approach--it will be necessary for newspapers not only to provide content but also to promote the wireless service in their pages. The equity option is the most valuable because it permits newspapers to profit most directly from joint control of the customer relationship. Yet newspapers should expect providers to surrender equity with a reluctance that can only increase as time passes.

If newspapers fail to pursue any option, they may find themselves in the position of broadcast television, which, by failing to dominate cable, ceased to be the medium of choice for advertisers trying to reach certain audiences.

The sooner newspapers act, the stronger their position will be and the more likely they are to succeed in offering pointers to other kinds of companies that missed the narrowband boat. In an evolving industry, a joint venture between wireless-service providers and newspapers would be flexible and agile enough to develop offerings rapidly. Newspapers with track records as online content providers will be in a stronger bargaining position when negotiating wireless deals. (The balance of power between service and content providers will vary by country.) Newspapers should weigh potential partners by examining their actual and projected penetration rates, which, in some countries, can be affected by the technology the service provider chooses. Newspapers can make this assessment by considering factors such as the number of subscribers to each service provider as well as its brand, how soon it plans to introduce 3G and its customer care practices.

The sophistication of the services offered will depend on the availability and performance of the underlying technologies. A stable network and robust enabling technologies such as billing and location-based services will be needed to ensure strong customer penetration and broad use of the new media channel. In the short run, newspapers should therefore focus on developing straightforward content such as stock quotations and news. We are already starting to see tie-ins between providers and news organizations. The Wall Street Journal and many other newspapers, for example, have made deals to supply news to PalmPilot users. The lead applications for AvantGo, which develops them for the Palm operating system, are stock reports, weather, news and sports; The New York Times, The Wall Street Journal, and USA Today are among AvantGo's most popular free providers of such content. Reuters, which has been working with Ericsson on a financial-news and data delivery project, is pushing its news and information services to Vodafone's subscribers.

National newspapers, with their broad and often sophisticated and affluent readerships, have led the race to crack the market for wireless data. But as wireless spreads, newspapers that offer primarily local content--as it happens, the majority--will also win significant customer bases.

Japan's NTT DoCoMo and its i-mode service demonstrate the potential value to a newspaper of having an equity stake in a wireless network. DoCoMo had an operating margin of 14.7 percent on revenues of $35 billion as of March 2000, the end of its last full fiscal year.

Successful wireless alliances are only the first step for newspapers. As the capabilities of wireless develop, the parties to such alliances may well want to find audio and video partners. Given the increasing availability of fixed broadband services in homes, any wireless alliance must be flexible enough to exploit new opportunities. In a few years, newspapers that have used their advantages well could find themselves strong players in both arenas. The sooner newspapers act, the stronger their position will be and the more likely they are to succeed in offering pointers to other kinds of companies that missed the narrowband boat.

For more insight, go to the McKinsey Quarterly Web site.

Copyright © 1992-2001 McKinsey & Company, Inc.